Good Morning,

Gold continued to erode in value overnight as background developments in oil and the dollar turned a notch further on the negative scale for the metal. The precious metal fell to a low of $858 ahead of the NY open as black gold slipped back towards $135 following reports that Saudi Arabia plans for a 'sizeable' increase in output and that its next meeting is intended to bring 'stability' to the world oil price. The kingdom's leaders see current values as threatening to derail the global economy and may have taken the pleas (as well as warnings of demand destruction) from part or all of the Group of Eight into account in making this decision.

Over in Japan, the Finance Minister of that country met with the Treasury's Henry Paulson and following their summit he was quoted as saying that the US and Japan need to 'coordinate actions closely because of the many risk factors.' Translation: The two countries will turn their focus on tackling inflation (surging oil, food, and other commodity prices) through joint intervention, if needed. Rising global inflation will also be at the top of the agenda of the meeting of the G-8 this weekend, and market watchers also expect some posturing from the participants as regards the desirability of a stronger US dollar.

Friday's New York session opened with a $2.10 loss in gold, at $866.00 bid as participants geared up for the release of CPI, consumer sentiment, and weekly leading indicator figures. Obviously, CPI numbers will play the role of the 800 pound gorilla in the room today. The CPI figures came in at 0.6% which was a tad higher than expected (largely due to a 5.7% jump in gasoline prices) and although they were not quite pointing to an angry ape, the Fed is clearly in no position to ignore the beast. However, since the numbers were more or less in line with market expectations, gold was able to regain some of the ground it had lost prior to the market opening.

We have now come to a juncture where high inflation and expectations of more of the same are (ironically) driving gold lower when they should be bolstering its oft-cited inflation-proofing qualities. The metal has its own 800 lb. gorilla in the room; the greenback specie(s). It has recorded its largest gain against the euro in three years. At last check, the currency was trading at 1.533 against the euro and was up .50 at 74.27 on the index. Gold, on the other hand showed losses of as much as 4.9% on the same week, due to the shifting dollar sentiment and extremely active official jawboning. Some mild bargain-hunting is managing to keep the metal off six-week lows, but the risk of further bouts of long liquidation has not abated.

At least for the moment, the sentiment among consumers and their inflation expectations might be more of a market mover for the day. Interest rates will have to rise, and now the game turns to guessing when such hikes will commence and whether the Fed will prove to be ahead of the curve this time, unlike where it was late last year with its cuts. Silver was quoted at $16.48 per ounce, up 4 cents while platinum rose $15 at $2028 and palladium added $9 to $445 per ounce.

Over to the noble metals market for a brief look at current conditions and the outlook. VM Fortis Group' findings (as reported by Mineweb) indicate that:

The outlook for platinum and palladium is mixed as different parts of the world are experiencing different trends in transport and vehicle sales - important factors in demand for both metals.

The Fortis/VM Group's Materials in Transport paper released today said European demand for palladium and platinum should remain steady over the current twelve months as new European Union member states will account for the bulk of vehicle sales.

The investment research document said the European trend of moving away from petrol to diesel-powered vehicles would continue, boosting demand for platinum rather than palladium metal. However, in the long-term, a focus on reducing the weight of motor vehicles to reduce fuel consumption and greenhouse gas emissions on the continent will lead to the manufacture of smaller catalytic converters requiring smaller quantities of both metals.

In the United States immediate prospects for the metals are slightly more negative as concerns over the economy are hitting vehicle sales significantly. Demand for platinum and palladium will also be dampened in the US in the longer term, as there are signs that US drivers are feeling concerned about fuel consumption and this will lead to higher demand for lighter cars. Also in the US, there are signs that diesel is becoming a more popular fuel, but its popularity still has a long way to climb before demand reaches European levels and boosts platinum demand at the expense of palladium.

In the East, Japan's declining domestic market will continue to diminish demand for both metals in that market. However, China will remain a major growth area due to the rate of economic expansion there.

Watch for market-moving effects from consumer sentiment statistics, keep an eye on G-8 pre-meeting and post-meeting position statements, and watch closing levels. Book-squaring aside, there is a Friday the 13th feeling out there and a close at or under $855 would look...scary.

Happy Trading